Tuesday, December 03, 2013

The Oriental Connection

Here is a little paragraph cut and pasted from Wikipedia:

On October 24, 2013, debt held by the public was approximately $12.122 trillion or about 72.8% of Q2 2013 GDP.[5][6] Intergovernmental holdings stood at $4.9 trillion (29%), giving a combined total public debt of $17.078 trillion.[5] As of January 2013, $5 trillion or approximately 47% of the debt held by the public was owned by foreign investors, the largest of which were the People's Republic of China and Japan at just over $1.1 trillion each.
Japan and China each hold over a trillion in our debt. If you can, picture some large building in each country that holds the notes of debt. That is literally what Joe Six Pack envisions when he read the above quote.

How about if we look at it in a different perspective. We spent a lot of money buying cell phones and other goodies in those countries, and the people we bought it from are coming over here and are buying real estate. So let’s do some back of the envelope math. Figure that we bought two trillion dollars of product made over there. And that everyone in China and Japan that made 10 million dollars wants to buy a home in California. If I’ve done the math right, that’s about 200,000 homes. But if we want a bottom limit, we need to figure the number of homes that could be bought if the Japanese or Chinese entrepreneur only had one million dollars, and we get 2 million homes. So we end up with a range of homes purchased, for cash from 200 thousand to two million. The thing you need to realize, is that the money we spent and can’t pay back to China and Japan,--and we are laughing about it--, has already been safely salted away (they bought US property).

Where is the bottom line? Who gets the last laugh? And the real question, who pays the piper for all of the future inflation from the tremendous cash infusion? Of course, I have to wonder, how our two trillion dollar debt with them, doesn’t drop a tad when everyone from the Orient buys a home in California?

Do you get the feeling that there is a lot of economic information out there that is very insignificant until it suddenly becomes significant? The Federal Reserve balance sheet from financing home loans comes to mind. It’s a little like selling invisible gold fish, nobody complains until they understand that they have been had.

Of course, there is a saying in California, “You can check in, but you can’t check out.” It could be true, I haven’t tried to move since coming here.

I'm waiting for Obama Tax Insurance--you get to keep more for earning more! Why does that seem so absurd?


Anonymous said...

And those same foreign buyers spend millions buying i-phones from apple, millions on buying the latest BMW, and so forth. They might and do buy real estate but they spend just as much if not more on healthcare in the states and other things like education!

Millions of Chinese parents send their kids to the u.s. and pay tens of thousands for their kids to go to college. And the difference is, the average chinese makes $6/day making cell phones but the average American makes at least ten times that!

Again, think about it, a Chinese company makes 0.50 cents on assembling the iphone but apple makes $100's of dollars on each iphone, who wins there?
How about when someone around the world spends money on a purse and Visa gets 3% on the transaction, who wins there? I mean, with the visa transaction, an american isn't even working. An american designed a server that processes payments but now he/she is vacationing somewhere and collecting transaction fees while the server does most of the work.

The point is that you simplify things to make a point but the truth is, the u.s. does a great job of trading.
We buy products with small profit margins while we sell products with high margins.
We buy jeans at 5-10% margin and sell patented medication with 1000% profit margin. Who wins there? americans do and that's why everyone around the world is trying so hard to immigrate to the u.s. and enjoy standard of living!

\all IMO of course.

dearieme said...

Chinese in California: this reminds me of the case of a worry in Denmark a few years ago. The population became a bit restive about the number of Germans buying property in southern Jutland. They wouldn't have worried had the buyers been Spanish or French or Italian; it's when your neighbours start buying property on your side of the border that concerns are raised. Still, the Pacific is wide isn't it? Isn't it?

Jim in San Marcos said...

Hi Anon 7:25

You are missing the point. Instead of holding our worthless T-bills, they are buying physical assets. We could end up working for them in our own country.

Joseph Oppenheim said...

Those left behind will never understand our economy. Our national debt of abt $17T is dwarfed by our assets. And, yes stocks represent some of those assets, abt $18T worth. Our economy is a knowledgè-basèd economy. And, the US is the #1 consumer market on the planet.

There is a reason CA is the billionaire capital of the world. That's why Elon Musk came from Africa, Sergy Brin from USSR, abt 2/3 of Silicon Valley companies founded by foreigners, etc, etc.....all financed by NY's WS. Yeah, WS crashed the world economy, but, it is a better regulated WS driving the current economic boom. Sure, there are some left behind, but globalization has changed everything and more people in the world have been lifted from poverty.

China's wealthy wanting to buy and raise their kids in CA? Duh!

BTW, I just bought some US debt....2023 TIPS for less than par value....make profits whether inflation or deflation.

Aki Suomela said...

I still believe US is just going through a phase right now and the big ole American Dream is still alive for the non-Americans.

Jim in San Marcos said...

Hi Aki

I think you hit the nail on the head. Where you are coming from, plays a major part in motivating you towards future goals.

Sackerson said...

According to James Kynge, the Chinese only get about 15% of the end price. The ones eating up America are those who get the other 85%. I understand some of them live in the Hamptons.

Joseph Oppenheim said...

Sackerson, that's because there are really only two places in the world, where real greatness is happening, NYC (the Hamptons being the preferred nearby getaway and Massachusetts also contributing), and CA, especially Silicon Valley.

Abt 2/3 of Silicon Valley companies were founded by immigrants. CA, just passed Russia as the world's 9th largest economy.

Wealthy Chinese are currently buying up prime CA RE. Why? Recently, mostly to eventually move here and send their kids to CA schools, the good ones...they breed creativity. BTW, with all its flaws, WS is important in that it funds many of the Silicon Valley start-ups. Yeah, paper US dollars are key.

Anonymous said...

Joseph O,

If Jim understood, he wouldn't be so pessimistic...ans waiting for depression that hasn't come for a decade.

Notice he didn't say anything about the Chinese selling our T-bills and buying i-phones and Gucci watches!

And Jim, I'm not missing the point, they are selling our T-bills and buying everything else under the sun, so what? same with the arab rich, just drive don to orange county, especially, the spectrum in Irvine and you'll see how our petro dollars are being recycled back.

And Joe, just like Jim, you are not keeping up with the times...what did you say about ILMN not being your kind of stock?
oh I see, a company making numerous 52 highs is not your type of stock, it's bc you like jim are still stuck in your antiquated ways. you talk about tech and california but refuse to profit from it.

When did I I tell you to look into ilmn, in the 70-80's, its right there in the posts. yeah i know, it trades at 100 earning but it also grows 30% a year.

the market now is a now brainier, buy anything decent and the fed will make sure it appreciates, if not through earnings growth, through inflation!

good luck to all and god bless.

don't become obsolete, learn all your life, that's the lesson i will always remind myself of.

Jim in San Marcos said...

Hi Anon 7:27

The depression is here. It has very little to do with pessimism, it has more to do with reality.

If you study economics and cycles along with the Kondratieff wave theory, depressions are inevitable.

Before the Great Depression Irving Fisher declared that stocks had reached a permanent high plateau and that the business cycle had been repealed. The implication was that economists had figured out how to eliminate cycles. It made great reading.

I worry when people claim the stock market or the fact that anything is a "no brainer." That's where the salesman makes a killing,--no risk, just a commission.

A pessimist is only an optimist with experience.

Best of luck to you too in the coming year, I think we will all need it.